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Do you have to whistle to the SEC to get protection under Dodd-Frank? The Second Circuit says no, splits with Fifth Circuit

Why it matters: Another day, another circuit split. On September 10, 2015, the Second Circuit in Berman v. Neo@Ogilvy LLC held that a relator does not have to specifically give information to the SEC in order to be able to take advantage of the whistleblower retaliatory protection provisions of Dodd-Frank. In so holding, the Second Circuit created a split with the Fifth Circuit, which had held in the 2013 case of Asadi v. G.E. Energy (USA), LLC that the "plain language" of the statute requires relators to go to the SEC with their whistleblowing in order to qualify for anti-retaliatory protections thereunder.

Detailed discussion: On September 10, 2015, the Second Circuit held inBerman v. Neo@Ogilvy LLC that a relator need not specifically provide information to the SEC in order to qualify for the whistleblower retaliatory protection provisions in Section 21F of Dodd-Frank. In so holding, the Court created a split with the Fifth Circuit, which had held in the 2013 case of Asadi v. G.E. Energy (USA), LLC that Section 21F requires a relator to go to the SEC in order to be afforded whistleblower protections under Section 21F.

The Second Circuit, in a majority opinion written by Judge Jon O. Newman, framed the issue before the Court at the outset: "This appeal presents the recurring issue of statutory interpretation that arises when express terms in one provision of a statute are arguably in tension with language in another provision of the same statute." The Court noted that, in the case before it, that tension occurs within the whistleblower protection provisions of Section 21F and that the SEC had issued an interpretive rule in 2011 "endeavoring to harmonize the provisions that are in tension." Cue the question of whether the SEC's interpretation of Section 21F should be given "Chevron deference" (i.e., the principle of administrative law established by the U.S. Supreme Court in 1984 inChevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. that requires courts to defer to reasonable and permissible interpretations of statutes made by the governmental agencies charged with enforcing them). More on this later.

The Court briefly summarized the facts of the underlying case as follows: Plaintiff-Appellant Daniel Berman (Berman) was the finance director of media agency Defendant-Appellee Neo@Ogilvy LLC (Neo) from October 2010 to April 2013. His responsibilities at Neo included overseeing Neo's financial reporting (including ensuring compliance with Generally Accepted Accounting Principles (GAAP)). In addition, Berman was responsible for the internal accounting procedures of Neo and its parent, Defendant-Appellee WPP Group USA, Inc. (WPP). In January 2014, Berman sued Neo and WPP in federal district court alleging that he was discharged in violation of the whistleblower protection provisions of Section 21F of Dodd-Frank. In his complaint, Berman alleged that during the course of his employment at Neo, he had discovered various practices that, he claimed, amounted to accounting fraud as well as violations of GAAP and the relevant provisions of both Dodd-Frank and the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley). Berman further alleged that when he reported these improper practices to higher-ups within Neo in April 2013, he was terminated. In August 2013, Berman reported his allegations to the WPP Audit Committee. While Berman was employed at Neo and for approximately six months after he was terminated, however, he did not report any of the allegedly improper practices to the SEC. The first time Berman went to the SEC with his claims was October 2013. Primarily for that reason, the district court judge dismissed Berman's complaint in December 2014, ruling in relevant part that the provisions of Section 21F "provided whistleblower protection only to those discharged for reporting alleged violations to the Commission" and that, because Berman had been terminated long before he went to the SEC, he could not benefit from the Dodd-Frank whistleblower protection provisions.

The Second Circuit reversed and remanded the case to the district court for further proceedings, holding that "the pertinent provisions of Dodd-Frank create a sufficient ambiguity to warrant our deference to the SEC's interpretive rule, which supports Berman's view of the statute," i.e., that reporting violations specifically to the SEC is not a prerequisite to qualifying for whistleblower protection under Section 21F.

The Court began its analysis with a review of the relevant provisions of Section 21F and highlighted the "arguable tension" between subsection 21F(a)(6), which specifically defines "whistleblower" to mean an individual who reports violations "to the Commission" (emphasis added), and subdivision (iii) of subsection 21F(h)(1)(A), which, "unlike subdivisions (i) and (ii), does not within its own terms limit its protection to those who report wrongdoing to the SEC. On the contrary, subdivision (iii) expands the protections of Dodd-Frank to include the whistleblower protection provisions of Sarbanes-Oxley, and those provisions, which contemplate an employee reporting violations internally, do not require reporting violations to the Commission."

The Court thus stated that "[i]n statutory terms, the issue presented is whether the 'whistleblower' definition in subsection 21F(a)(6) of Dodd-Frank applies to subdivision (iii) of subsection 21F(h)(1)(A). In operational terms, the issue is whether an employee who suffers retaliation because he reports wrongdoing internally, but not to the SEC, can obtain the retaliation remedies provided by Dodd-Frank." The Court pointed out that, to this last question, "[t]he SEC believes he can," citing to "Exchange Act Rule 21F-2" (Section 21F Interpretive Rule) issued by the SEC in 2011, which clarifies in the "Prohibition Against Retaliation" section that, as the retaliation protection provisions in Section 21F (h)(1)(A) cross-reference the reporting provisions of Sarbanes-Oxley—which protect an individual who reports wrongdoing internally without going to the SEC—then an individual does not specifically have to go to the SEC in order to qualify for Section 21F retaliatory protections. The Court also looked to the language in the SEC's release accompanying the issuance of the Section 21F Interpretive Rule, where the SEC made clear that it interprets the anti-retaliation protection provisions of Section 21F to extend to "individuals who report to persons or governmental authoritiesother than the Commission" (emphasis added).

After reviewing the applicable statutory language, the Court went on to state that "the more precise issue in the pending appeal is whether the arguable tension between the definitional section of subsection 21F(a)(6) and subdivision (iii) of subsection 21(F)(h)(1)(A) creates sufficient ambiguity as to the coverage of subdivision (iii) to oblige us to giveChevron deference to the SEC's rule." The Court answered this question in the affirmative, after a comprehensive review of the (a) case law involving the issue of statutory interpretation generally (specifically citing to the U.S. Supreme Court's recent decision in Burwell v. King), (b) legislative history surrounding the enactment of Section 21F (which yielded no clarification as to legislative intent) and (c) decisions reached by other courts facing the same issue (specifically referencing the Fifth Circuit's contrary decision in Asadi, discussed below). Thus, after givingChevron deference to the SEC's Section 21F Interpretive Rule, the Court held that "Berman is entitled to pursue Dodd-Frank remedies for alleged retaliation after his report of wrongdoing to his employer, despite not having reported to the Commission before his termination."

In reaching its conclusion to grant Chevron deference to the SEC's interpretation of Section 21F, the Court noted that the Fifth Circuit in the 2013 Asadi decision had ruled the other way when confronted with the same issue and had held the Section 21F(a)(6) definition of "whistleblower"—and specifically the words "to the Commission" contained therein—to be controlling: "The plain language of the Dodd-Frank whistleblower-protection provision creates a private cause of action only for individuals who provide information relating to a violation of the securities laws to the SEC …. Because Asadi failed to do so, his whistleblower-protection claim fails." The Court pointed out, however, that while some district courts had specifically followed the Fifth Circuit's ruling in Asadi—indeed, a Northern District of California judge just did so on September 8, 2015 in Davies v. Broadcom Corporation—"a far larger number of district courts have deemed the statute ambiguous and deferred to the SEC's [Section 21F Interpretive] Rule." Thus the Court reasoned that "although our decision creates a circuit split, it does so against a landscape of existing disagreement among a large number of district courts."

It should be noted at this point that on August 4, 2015, the SEC issued a release titled "Interpretation of the SEC's Whistleblower Rules under Section 21F of the Securities Exchange Act of 1934" where it reiterated its position that a relator does not have to provide information to the SEC in order to qualify for whistleblower protection under Section 21F. The SEC specifically cited to the Fifth Circuit's Asadi decision, calling it "not consistent with Rule 21F-2 [i.e., the Section 21F Interpretive Rule]" and stating its belief that the decision "would undermine the overall goals in implementing the whistleblower program." The Second Circuit did not cite to this latest August 4 interpretive release by the SEC regarding Section 21F, but it would surely have only bolstered the Court's decision to grant Chevron deference to the SEC in this matter.

In his dissent, Judge Dennis Jacobs took the strict constructionist approach to interpreting Section 21F and cited to the Fifth Circuit's Asadidecision when he stated that "[t]he majority and the [SEC] have altered a federal statute by deleting three words ('to the Commission') from the definition of 'whistleblower' in the Dodd-Frank Act. No doubt, my colleagues in the majority, assisted by the SEC or not, could improve many federal statutes by tightening them or loosening them, or recasting or rewriting them. I could try my hand at it. But our obligation is to apply congressional statutes as written. In this instance, the alteration creates a circuit split, and places us firmly on the wrong side of it."

Compare jurisdictions: Employment & Labor: North America

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